While global banks have begun a broad retreat from infrastructure debt, Asia’s national banks do not appear to be leaving the asset class in their home markets yet, and may compete with non-traditional lenders, delegates heard at the Infrastructure Investor Global Investment Forum in Hong Kong.
Regulations like Basel III are expected to get banks scrambling over the next year as they seek to adjust their balance sheets. According to Andrew Jones, AMP Capital’s managing director for infrastructure debt, large banks are expected to retreat from illiquid loans such as infrastructure, making way for the entrance of non-traditional lenders such as private equity firms and institutions.
However, it will be a different story in Asian countries, according to Richard Dawson, KPMG’s head of debt advisory for Asia. The banks remain dominant in infrastructure debt in Asia’s emerging economies, and they are very liquid. Dawson estimates that south-east Asians have saved approximately $6 trillion over the past five years.
Dawson added that he does not see too much appetite for emerging markets infrastructure debt at this point, as most core funds and institutions prefer the developed, regulated markets. Hence, he predicted that banks in Asia will remain dominant for some time.
“Asian banks are some of the largest, most capitalised in the world – and they move fast to protect their home markets,” Jones added. He highlighted Japan and Korea in particular, where the local banks usually take most of the opportunities in support of the domestic market and companies.
Indeed, some Asian institutional investors are even steering away from infrastructure debt in the region. Hideo Kondo, asset management director at Japan-based DIC Pension Fund, said his firm has kept its infrastructure equity and debt investments outside Japan up to now, mostly in the regulated markets of Europe and the US.
“The Japanese government has asked us why we’re not investing in Japanese infrastructure [debt],” Kondo said on the debt panel. “And our answer is the regulations: Japan needs to learn how to manage its infrastructure properly before we can provide infrastructure debt.” He added that this has already begun a long debate in Japan about deregulating the sector.
Although the Asian infrastructure debt market right now remains most comfortable for banks, Hastings Funds Management infrastructure debt investment director Ross Pritchard predicted that – as happened in the West – the market will migrate to being more comfortable for institutional investors over time.
“Banks are best for three- to five-year loans, but long-term assets like infrastructure need long-term funding,” he said. “That needs different sources.”